Sallie Mae 2013 Annual Report Download - page 154

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
losses are unemployment rates and other asset type delinquency rates. More judgment has been required over the
last several years, compared with years prior, in light of the recent downturn in the U.S. economy and high levels
of unemployment and its effect on our customer’s ability to pay their obligations.
Our allowance for loan losses is estimated using an analysis of delinquent and current accounts. Our model
is used to estimate the likelihood that a loan receivable may progress through the various delinquency stages and
ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it requires
material estimates that may be susceptible to significant changes. The estimate for the allowance for loan losses
is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries
are significantly different than estimated, this could materially affect our estimate of the allowance for loan
losses and the related provision for loan losses on our income statement.
Below we describe in further detail our policies and procedures for the allowance for loan losses as they
relate to our Private Education Loan and FFELP Loan portfolios.
Allowance for Private Education Loan Losses
We determine the collectability of our Private Education Loan portfolio by evaluating certain risk
characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan
seasoning as the key credit quality indicators because they have the most significant effect on our determination
of the adequacy of our allowance for loan losses. The type of school customers attend can have an impact on
their job prospects after graduation and therefore affects their ability to make payments. Credit scores are an
indicator of the creditworthiness of a customer and generally the higher the credit score the more likely it is the
customer will be able to make all of their contractual payments. Loan status affects the credit risk because
generally a past due loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a
deferred payment status have different credit risk profiles compared with those in current pay status. Loan
seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of
default than a loan with a history of making infrequent or no payments. The existence of a cosigner lowers the
likelihood of default. We monitor and update these credit quality indicators in the analysis of the adequacy of our
allowance for loan losses on a quarterly basis.
To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical
experience of customer payment behavior in connection with the key credit quality indicators and incorporate
management expectation regarding macroeconomic and collection procedure factors. Our model is based upon
the most recent 12 months of actual collection experience, seasonally adjusted, as the starting point and applies
expected macroeconomic changes and collection procedure changes to estimate expected losses caused by loss
events incurred as of the balance sheet date. Our model places a greater emphasis on the more recent default
experience rather than the default experience for older historical periods, as we believe the recent default
experience is more indicative of the probable losses incurred in the loan portfolio today. Similar to estimating
defaults, we use historical customer payment behavior to estimate the timing and amount of future recoveries on
charged-off loans. We use judgment in determining whether historical performance is representative of what we
expect to collect in the future. We then apply the default and collection rate projections to each category of loans.
Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and
determine if qualitative adjustments need to be considered. Additionally, we consider changes in laws and
regulations that could potentially impact the allowance for loan losses. More judgment has been required over the
last several years, compared with years prior, in light of the U.S. economy and its effect on our customer’s ability
to pay their obligations. We believe that our model reflects recent customer behavior, loan performance, and
collection performance, as well as expectations about economic factors.
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